How To Track Your Small Business Expenses (4 Easy Tips)
Tracking business expenses is a lot less painful if you have the right tools. These tools will help make tracking business expenses a daily habit. This will help you keep a closer eye on how much you’re spending as a small business owner. And managing your expenses better will increase profitability.
Tracking your business expenses also makes tax time a lot simpler as many expenses can be claimed as write offs. If you track your expenses on a regular basis you’re more likely to not miss potential deductions. This means you’ll pay less at tax time (or get more back).
In this article, we’ll cover the following tips to track your business expenses:
- Open Business Financial Accounts
- Store Receipts Properly
- Make a Spreadsheet
- Use Cloud Accounting Software
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
1. Open Business Financial Accounts
Freelancers and small businesses may find that the line between their personal and business finances is pretty blurry. Come tax time, you may find yourself digging for business expenses among your grocery and clothing purchases.
Open business financial accounts so that business-related expenses are crystal clear. Then use your business accounts for all business purchases.
You’ll need to open:
- A business chequing account
- A business savings account
- A business credit card
It also pays to put your business expenses on a credit card with great rewards. Some credit cards offer cash back on purchases. Others let you collect and redeem points for flights and hotels. Forbes has a list of some of the best business credit cards.
Entrepreneur recommends avoiding using cash, when possible. Cash is too easy to spend, hard to track and only has a receipt as a backup, unlike a digital transaction which has a record in your bank statement and a receipt. It’s better for your business, better at tax time and definitely better if you get audited to use debit and credit for purchases.
2. Store Receipts Properly
Here are some strategies to keep paper receipts organized:
- Keep a separate envelope in your purse or bag for business paper receipts. If you can’t commit to filing your receipts daily, set aside time on a weekly basis to put those receipts away. Friday afternoon is one option–and be sure to add this task as a recurring appointment on your calendar.
- Use file folders. At the beginning of the year, make one for each month and file your receipts accordingly. Use either a filing cabinet or an accordion folder.
- Use binders. Buy plastic sleeves and label them by month or category. If you have lots of receipts, organizing by category may make things easier come tax time.
Don’t forget to write on your receipts what the purpose of the purchase was. A receipt for a $10 sandwich six months ago won’t tell you much unless you write down that it was bought during a lunch with a specific client.
It’s a good idea to keep a detailed business calendar as a backup, whether on paper or in Google or Outlook. Then you can reference back and see who you had lunch with on June 2 of the previous year.
Remember, the IRS requires small business owners to keep their paper receipts, as well as any other supporting documentation like bank statements, for at least three years.
There are many apps that make it easier to store receipts digitally. Plus, if you scan your receipts you don’t need paper backups, according to Entrepreneur.
The FreshBooks app has a feature that lets you easily photograph and store receipts in the cloud, while automatically adding the expense to your books.
You’ll also want to track your mileage if you use a vehicle for business purposes–businesses can claim mileage as a deduction on their taxes. The standard mileage rate for 2018 is 54.5 cents per mile, according to the IRS.
FreshBooks integrates easily with Everlance, an app that tracks your mileage for both tax and invoicing purposes. The app is free for up to 30 trips per month and it sends your mileage to FreshBooks, where it’s automatically added to your expenses.
3. Make a Spreadsheet
This option works if you prefer a low-tech approach to tracking your expenses or if you’re just starting out as a business. That said, as your business grows (and your number of expenses grows as a result) you’ll want to use a more sophisticated tracking method. One method is cloud accounting software, which is covered in the next section.
Spreadsheets are also easy to import into your accounting software to batch add expenses.
Make a spreadsheet in Excel or Google with the following columns:
January cell phone bill
Consider using the following categories:
- Client meals
- Home office or office rent/mortgage and utilities
- Travel expenses
- Office supplies
4. Cloud Accounting Software
By 2020, more than 90 percent of small businesses will use cloud accounting software, according to Accountex. A big reason for this high adoption rate: owners want to access their accounting data on their cell phones.
Cloud accounting software also lets small business owners add expenses on the go, whether they’re traveling to a conference or out meeting a client.
This software also connects to your bank account and credit card so your expenses update automatically (and daily!). This is a big reason to use digital transactions over cash.
Your tax records will also be more secure, should you ever be audited. Spreadsheets can disappear if your computer crashes. Paper receipts can get lost. But accounting data stored in the cloud keeps all your records in one place, securely.
A final benefit: your subscription to your cloud accounting software is usually tax deductible.
People Also Ask:
How Do I Keep the Books for My Small Business?
Set up accounting books for your small business in five easy steps:
1. Choose An Accounting System
Most new small businesses choose single-entry bookkeeping for its ease of use. With this system, you record income when you receive it and expenses when you pay them.
Growing small businesses will want to transfer to a double-entry method to take advantage of its advanced financial reporting. Choose accounting software that lets you easily make the switch from single to double-entry bookkeeping.
2. Choose a Recording Method
Recording transactions by hand is possible, as is making a custom spreadsheet. But cut down on errors by using accounting software that does the calculations for you. If you’re really against doing your own books you can hire an accountant or in-house bookkeeper, but this route is usually too expensive for a small business.
3. Set Up Accounts
Accounting software will suggest categories for your transactions but you’ll want to add or subtract categories specific to your business.
Common small business accounts include:
- Checking account
- Savings account
- Credit card
- Accounts payable (money owed by a company)
- Accounts receivable (money owed to a company)
- Petty cash (physical cash on hand)
4. Set Up a Business Bank Account
Separating your personal and business finances will help at tax time. Then you can connect your business accounts to your accounting software without worrying about importing your personal Netflix subscription. Make sure to reconcile your bank statement monthly with your books. This means checking the records in your accounting software against those in your bank statements.
5. Make an Invoice Template
Set up your invoice template, whether in your accounting software or by downloading a template online. Most service-based small businesses offer credit, meaning they send an invoice after a project is complete and let the client pay at a later date.
Payment terms need to be included on each invoice. This should include your contact information, how to pay you and when the invoice is due–30 days after sending the invoice is a good rule of thumb. Setting up payment terms can help you get paid on time and makes it clear when you should be paid. This will improve your cash flow, which is hugely important for a new small business.